Aberdeen Global - Hozam Plaza

Eastern European EquityFor the year ended 30 September 2012PerformanceFor the year ended 30 September 2012, the value of the EasternEuropean Equity - S Accumulation shares increased by 23.29%compared to an increase of 23.07% in the benchmark, theMSCI EM Europe 10/40 Index.Source: Lipper, Basis: total return, NAV to NAV, net of annual charges, gross incomereinvested, EUR.Manager’s reviewEastern European stocks posted robust gains during the review period,despite nagging worries over the Eurozone sovereign debt crisis andthe global slowdown. Sentiment was also supported by interest ratecuts across most of the region, as central banks responded to falteringgrowth. Initially, resilient German data, Greece’s second bailout and theEuropean Central Bank’s (ECB) liquidity injections drove markets to ahigh in mid-March. But contagion fears later escalated as Spainsuffered a sovereign credit rating cut and a potential Greek Eurozoneexit loomed. The sharp market decline was followed by an equallyrobust rebound after policymakers in major developed countries easedmonetary policy to boost growth.Portfolio reviewAt the stock level, the lack of exposure to Russian miner NorilskNickel contributed the most to performance as its share price wasweighed down by corporate governance concerns and a sharp dropin nickel prices. Our holding in Polish cash-and-carry retailer Eurocashbolstered relative return following the acquisition of key rival Tradis.Another solid performer was BIM, as effective cost control led tobetter-than-expected margin improvements for the Turkishdiscount retailer.In portfolio activity, we introduced O’Key, a leading Russianhypermarket retailer with experienced management and robustfundamentals, and top-sliced Russian telecom companyVimpelcom on valuation grounds.OutlookCEE economies remain the most exposed to Eurozoneheadwinds, given their deeper trade and financial links. While theECB’s commitment to buy sovereign bonds has reduced contagionrisks significantly, it is facing stiff German opposition while longer-termstructural flaws have yet to be adequately addressed. Elsewhere, thelooming fiscal cliff in the US may tip the economy back into recession.Among key CEE economies, Russia remains resilient with domesticdemand driven by expansionary fiscal policy and credit growth. Turkey’seconomy is experiencing a soft landing but policymakers are grapplingwith supporting growth amid high inflation, while there is not muchroom for fiscal stimulus in Poland.Investor sentiment is therefore likely to remain subdued, with theoutlook susceptible to further economic or policy disappointments.Earnings growth for 2012 is also expected to be marginal in thecircumstances. During such times, balance sheet strength andmanaging growth in a relatively conservative and disciplined mannerbecome even more important and these are the very attributes thatcharacterise many of our holdings.Conversely, Societe Generale’s Romanian subsidiary BRDdetracted the most as it reported weak results amid a difficultoperating environment. Two Russian holdings also hurt performance:food retailer X5 Retail lagged on the back of sluggish trading figuresand the resignations of several key executives, while vodka-makerSynergy’s interim earnings fell by half because of a spike infinancing costs.58 Aberdeen Global - Eastern European Equity